Ag markets were lower on Monday except for cattle futures.
Soybeans Plunge with Brazilian Real
The soybean markets lost 16 cents basis the January contract in reaction to the results of the Brazilian presidential election. The real plunged as Lula surprisingly was re-elected for a 4th term over Bolsonaro, while the U.S. dollar index gained ground.
Alan Brugler with A&N Economics says, “The trade had been anticipating a more active economic capitalist in Bolsonaro. So bottom line is with that weakness in real, you’re going to see a little more competition out of Brazil on exports when you’re looking at them in dollar terms. You’ll probably see the Brazilian prices in reals going up a little bit here, but that’s because each real is worth less.”
That could take away soybean exports from the United States. It can also make it more attractive for Brazilian farmers to sell when the real depreciates to the U.S. dollar as that is how their soybeans are priced.
Brugler says farmers are likely waiting to see if this is just a one-day market move or not.
Soybeans Hold Key Support
Soybeans held the 100-day moving average and Brugler is also watching the uptrend line at $12.38 basis the November, which also held.
“The big picture, the monthly picture is a lot wider, of course, $13.32 is the main resistance and $11.20 is the maximum downside risk from my view,” he explains.
More Fund Liquidation
The other question is whether or not the funds will liquidate more of the long position, which as of last Tuesday’s CFTC report was still at over 206,000 contracts.
Demand is an underlying supportive feature and export inspections were strong at 91 million bushels, and with China in buying that may hold the market together.
He says, “Export inspections are running, I believe, more than 40% above year ago to date. And that’s going to help support the market. But conversely, if you’re not getting new business because the real has suddenly made the Brazilians more competitive, the market has to keep up with that, try to reprice it to where we are competitive.”
Corn Falls With Soybeans, Real
The corn market also made new lows for the move following soybeans and with the lower real and higher dollar.
“But I think the bottom line is, yes, Brazil is a major corn exporter. So you’re going to see that real impact on corn exports there. It’s not the peak period for Brazilian corn exports, of course. Their seasonality is a little different. The second crop is the big export crop. That’s back in July and August. So you’re working past the peak supplies here.”
Corn export inspections were only 24.6 million bushels Monday morning and total inspections for the marketing year are lagging. He says some of that is due to the improvement in the soybean inspections.
“You just can’t get the corn on a boat right now. So we are down more than 7% year over year on corn right now,” he explains. Last year the U.S. did not have a soybean export program as China was out of the market and corn had to back fill.
Corn Hit New Lows for the Move
Corn futures also made new lows for the move but are holding above $4.50, which is psychological support. However, where is the next technical support?
“Well $5.20 is the resistance for sure and we’re looking for a seasonal low probably before the end of November. Main support or uptrend on the monthly charts clear down to $3.89 but I don’t think we have to go there, so $4.32 is support,” he explains.
USDA Report Error
The corn market has continued to see the hangover of the last two USDA reports and the nearly 400 million bushels added to the balance sheets.
USDA came out late Friday and admitted a processing error in the September report on Nebraska and Kansas corn yields and ear counts. Nebraska corn yield was raised 5 bushels per acre, while Kansas was lowered by 3 bushels per acre. It only raised the national yield by .3 bushels to 178.8 bushels per acre.
It does tarnish the USDA’s image according to Brugler, “Well, I think we do have a farmer trust issue here because of the revision. But to USDA’s credit, they didn’t try and hide it in residual use or somewhere later on. They just flat out said, hey, you guys are right. We found an error. The practical impact, though, is there were a lot of people questioning the October Nebraska number, particularly the 11 bushel increase in Nebraska.”
With the upward revision in the September number, USDA narrowed the yield gap between September and October.
Yield Questions
Brugler says their model still suggests the current yield is too high on corn.
He is not sure USDA will reflect that in the November report even though yield results out in the field would suggest that. “I’m hearing some pretty nasty yields versus expectations in Nebraska, out in the irrigated country particularly.”
Brugler’s virtual corn tour suggests 178, 179 is probably the sweet spot. USDA is above that right now at 181.2 bushels per acre.
“Whether they drop that November or January remains to be seen. But typically, that number is within 2% of final,” he adds.
Wheat Falls to Fresh Lows
All three wheat exchanges made new lows for the move as well and hard red winter had now corrected nearly $2 off the highs in September.
The higher dollar was a headwind as well as poor demand. Export inspections were at only 6.8 million bushels and total exports are running 35% behind last year.
The market is also pinning its hope on a peace accord between Russia and Ukraine and at the same time both countries struggle to move any product with the shipping disruptions.
“The market got really optimistic that we were going to see more U.S. exports to fill that gap. That’s clearly not happening. I think we got ahead of ourselves on the pricing and particularly the freight cost issue. The U.S. has always got a freight cost disadvantage versus Europe or Russia or Ukraine going into some of the major buyers like Egypt. Right now, as is well advertised, fuel costs are up quite a bit. And that translates into more cost per ocean mile from the U.S. So the market’s got to adjust our pricing down.”
He says it is also the wrong time of year for the U.S. to be competitive on wheat.
Cattle Make Fresh Highs
Live and feeder cattle futures made new highs for the move with the help of a bullish Cattle on Feed Report and higher cash.
Brugler says the lower real likely had an impact on the market. “You know, with the real down, the Brazilian beef exports are theoretically going to be a little more competitive in third party countries. The yeah, I think that muted the cattle and feed response a little bit.”
Feeder cattle were also seeing an offset from USDA opening the Columbus, New Mexico port to feeder imports out of Mexico.
Lastly, he points to the quarterly steer to heifer ratio which showed more heifer retention and less going into feedlots.
Stronger Cash, Limited Volume
Cash trade was stronger in the south at $230, up $2 and the north traded at $228 to $228.50 live with $365 dressed.
The volume was light but indicates that producers do have the leverage to hold out for higher prices.
“Well, I think cash is still king,” remarks Brugler, “The packer margins are still pretty snug overall. So you know if the box beef markets are up if they’re able to move the product they’re able to pay up for the cattle,” he adds.
Brugler says the packers would love to have bigger margins and that’s why they closed three plants to try to firm up their margins.
“Bottom line is if if you’ve got choice choice beef cutouts where they are then the cash cattle price should go up to reflect that,” hesays.
Lean Hogs, Broken Record
Lean hogs saw new contract lows again on Monday as cash and cutouts cannot seem to bottom.
The monthly cold storage report also showed inventory in freezers was up nearly 9% year over year.
“We are accumulating pork in cold storage relative to year ago. But that suggests the market needs to do a little more aggressive job of moving it on the cash side. And typically, you know, the packers are going to try and get that. If they’ve got to discount the pork, they’re going to try and discount the hogs that are creating the pork,” he concludes.
